This indicator is a volume based indicator developed by Marc Chaikin which measures the cumulative flow of money into and out of an instrument. The A/D line is calculated by multiplying the specific period’s volume with a multiplier that is based on the relationship of the closing price to the high-low range. The A/D Line is formed by the running total of the Money Flow Volume. This indicator can be used to assert an underlying trend or to predict reversals.

Calculation

A/D Line = Previous A/D Line + Current Period's Money Flow Volume

where,

Money Flow Volume = Volume of current period x Money Flow Multiplier

Money Flow Multiplier =

(Closing price - Low) - (High - Closing price)

(Hight - Low)

The Money Flow Multiplier ranges between -1 and +1.
Money Flow Multiplier is positive when the closing pricing is in the upper half of the high-low range.
Respectively the Multiplier is negative when the closing price is in the lower half of the range.

Signals

The combination of a high positive multiplier value and high volume indicates buying pressure. So even with a downtrend in prices when there is an uptrend in the Accumulation Distribution Line there is indication for buying pressure (accumulation) that may result to a bullish reversal.

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